If counter-cyclical fiscal policy causes crowding-out,which of the following statements is correct?
A)Crowding-out increases the effectiveness of fiscal policy by pushing up interest rates and reducing investment spending.
B)Crowding-out reduces the effectiveness of fiscal policy by pushing up interest rates and reducing investment spending.
C)Crowding-out reduces the effectiveness of fiscal policy by lowering interest rates and reducing investment spending.
D)Crowding-out enhances the effectiveness of fiscal policy by lowering interest rates and increasing investment spending.
E)Crowding-out reduces money demand and thereby reduces the effectiveness of fiscal policy.

Question

Quizplus · Accepted Answer

Crowding-out occurs when increased government spending leads to higher interest rates, which in turn reduces private investment spending. This reduces the effectiveness of fiscal policy, as the intended increase in aggregate demand is offset by the decrease in private investment. Therefore, option B is correct. Options A, C, and D are incorrect as they suggest that crowding-out enhances the effectiveness of fiscal policy, which is not true. Option E is also incorrect as it focuses on the effect of crowding-out on money demand, which is not directly related to the effectiveness of fiscal policy.

If Counter-Cyclical Fiscal Policy Causes Crowding-Out,which of the Following Statements